Driven by stronger than anticipated acquisitions, a popular content slate and the continued ability to convert unpaid accounts, Netflix had a healthy second quarter. The streamer saw revenue grow 17% in Q2, driven primarily by a 16% year-over-year increase in average paid memberships.
“We’re clearly seeing healthy organic growth in the business, but we’re also continuing to get better and better at translating improvements in our service into business value, including getting better and better at converting unpaid accounts,” said chief financial officer Spencer Adam Neuman, in a call with investors. “And at least on the paid member front, we’re also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan.”
A letter to investors says operating income for Q2 amounted to $2.6B, an increase of 42% vs. the second quarter of 2023. Operating margin of 27.2% improved five percentage points vs. 22.3% in the year ago quarter. Due to higher than expected revenue, both were slightly above the company’s guidance forecast.
The streamer also reported progress scaling its ads business. Ads tier membership grew 34% quarter on quarter, and it reminded investors that it is building an in-house ad tech platform that it will test in Canada in 2024 and launch more broadly in 2025.
Netflix said it was on track to achieve critical ad subscriber scale for advertisers in its ad countries in 2025, which it predicts will create a strong base from which it can further increase its ad membership in 2026 and beyond.
However, not everything is rosy in its ad business, as we learned that Peter Naylor, its most experienced ad executive who had come to Netflix from Hulu, had exited the company.
“Our ad revenue is growing nicely and is becoming a more meaningful contributor to our business. But building a business from scratch takes time – and coupled with the large size of our subscription revenue –we don’t expect advertising to be a primary driver of our revenue growth in 2024 or 2025,” the company said in a statement.
“If we can keep improving that value translation mechanism each quarter and keep improving the entertainment offering that it operates on top of, those two things compound and drive the business.” adds Gregory K Peters, co-CEO, president and director. “They’ll drive the business through the rest of the year. And that really allows us to more effectively get more of those 500 million-plus and growing smart TV households around the world that aren’t currently members to sign up.”
Even without those sign ups, the streamer is programming for an audience of more than 600 million. “It’s a huge number and to delight this many people, we need lots of great stories that appeal to many different tastes and moods. It’s why we continue to increase the investment in our programming, even as many of our competitors are pulling back,” the company said.
